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Why Economics Should be More Like the Economy

July 27, 2018

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G.M. Peter Swann, Emeritus Professor of Industrial Economics Nottingham University Business School

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I believe that the operation of an economy is a good model for the operation of an academic discipline like economics. A well-functioning economy is one where there is healthy competition, we trade with other economies, and pursue innovations that improve the performance of the economy and create wealth. In the same way, a well-functioning discipline should also have healthy competition, trade with other disciplines and pursue innovations that improve the performance of the discipline and create knowledge.

Is this what we find in the economics discipline? Up to a point, yes. There is some competition, trade and innovation in the discipline, but I would say that it is much more limited than what we would find in a healthy economy.

This short piece focuses on innovation. The first important lesson we learn from studying innovation in the economy is that there is an essential distinction between incremental innovation and radical innovation. The use of the adjective incremental need not mean that the innovations are small. It means that they involve successive improvements in achieving a specific objective, where each innovation builds on all that has gone before. And the use of the adjective radical need not mean that the innovations involve ‘rocket science’, nor that they are controversial, but it does mean that they involve going back to the ‘roots’, and doing some things in a different way. If the process of innovation is to fulfil its full economic potential we need both types of innovation. Neither is sufficient without the other.

The second important lesson is that incremental and radical innovations tend to emerge from rather different environments. The best environment for incremental innovation is one in which there is an enduring division of labour. This is often an organisation with a reasonably stable organisational structure, where job descriptions and work routines are narrowly defined and stable over time. Staff build up a detailed knowledge of their part of the production process over a long period, and so they are exceptionally well qualified to point out ways in which it could be improved. Moreover, in such an organisation, staff in one specialised division often have little or no horizontal communication with other divisions, for the simple reason that it would serve no purpose. In such an environment, staff are encouraged to think inside the box.

In contrast, the best environment for radical innovation is one where staff are encouraged to bring together disparate and dissimilar knowledge. This is an organisation that wants some employees, at least, to think ‘outside the box’, because thinking outside the box is the best route to radical innovation. One type that is often discussed in this context, is the relatively young company, that has not yet developed a rigid organisational structure, where job descriptions are not ‘set in stone’, and where work routines are not stable over time. In such a ‘melting pot’, variability in working patterns means that workers are constantly being assigned to different groups, where they interact with people of different experience. In such an environment, staff are encouraged to think outside the box, and they are empowered to do so because they have accumulated considerable experience of problem-solving in teams with people of different experience and with diverse knowledge bases.

Mainstream economics is good at incremental innovation because it resembles the first type of organisation described above. But it is bad at radical innovation because it does not remotely resemble the second type of organisation described above. Indeed, mainstream economics clearly feels uncomfortable with most radical innovation.

In an innovative sector of the economy, it is commonplace to find an industrial structure that includes both types of organisations. There are the well-established and large incumbent firms who offer mainstream products and services, and incremental innovations. There is also a fringe of newer and innovative firms who aim to improve on some of the offerings from the mainstream, and offer something radically different. This is entirely healthy. In the same way, I think it is entirely healthy to create a similar ‘industrial structure’ in the economics discipline, and a similar fringe where radical innovations can flourish. That is radical, in the sense that it means going back to the roots and doing some things in a different way, but I don’t think it is controversial.

How do we create such an industrial structure? We should follow the example of many other disciplines, and change the constitution of the economics discipline from the conservative unitary state that it is at present, into a federation of semi-autonomous sub-disciplines. The following disciplines have all gone down that route: medicine, physics, chemistry, neuroscience, materials science, cognitive science, computing, geography, history, and business studies. Economics has sub-disciplines, certainly, but they enjoy little or no autonomy. Semi-autonomy is essential because radical innovation entails doing things that the mainstream may not approve of, but which are essential to solve the problems facing the discipline as a whole. These necessary innovations will only flourish in a federation where each sub-discipline has sufficient autonomy.

What new things will we find in the federation? If we are to give economics a proper empirical foundation, rather than rely on the black-box foundations built by econometrics, then we need to emulate the three essential empirical foundations of medical science: anatomy, physiology and pathology. Economic anatomy and economic pathology are still hopelessly under-developed. Economic physiology is quite well developed, but it is a black-box science, and does not draw on a deep understanding of economic anatomy.

There will also be a variety of hybrid disciplines in this economic federation – just as there are in medicine. These will include hybrid disciplines formed from several academic discipline – for example, in my own field of innovation. There will also be hybrid disciplines formed by academic economists working together with a wide variety of practitioners. These hybrid disciplines can play an essential part in addressing many sources of discontent amongst those outside the economics discipline.

This is how the economy creates the necessary mix of incremental and radical innovations.

I believe that it would be a very good idea if the economics discipline were to become more like the economy.

G.M.P Swann, Economics as Anatomy: Radical Innovation in Empirical Economics, Cheltenham: Edward Elgar Publishing (2019)

 

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The Increasing Importance of Economic Diplomacy

July 20, 2018

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Symbolizing of peace. Hand of North Korea gives a help for a hand of the United States

Peter A.G. van Bergeijk and Selwyn Moons look at and analyse the importance of economic diplomacy.

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The Emergence and Progress of Behavioral Economics: Does It Constitute a New Paradigm?

October 25, 2017

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John F. Tomer, evaluates the paradigm of behavioral economics

concept - love it, change it, leave it

 

Economics is a science, a social science. It is a science whose practices have for a number of decades been contested. […]

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Public Debt, Primitive Datum?

July 18, 2017

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Coins

Giuseppe Eusepi and Richard E. Wagner give an analysis on Public Debt. […]

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Which Articles have most Influenced Law & Economics Scholarship?

June 27, 2017

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A curated list of the critical research papers

For eleven years Edward Elgar Publishing has published the acclaimed Economic Approaches to Law (EAL) Research Collection series, edited by Judge Richard Posner and Professor Francesco Parisi.

The Research Collection format is designed to improve print access to journal literature, reproducing the most important and influential English language journal articles and papers in a particular field. Each title is edited by leading scholars and includes an original review article, setting their choices into context.

In 2016, the EAL series celebrated its 50th release – Economics of Corporate Law edited by Professors Claire A. Hill and Brett H. McDonnell. A full list of titles in the ‘Economic Approaches to Law’ series can be found at the foot of this post.

The combined listing of 1356 articles, by 1215 scholars, provides a data set for some interesting analysis of the most influential scholars and key contributions across the discipline.

This analysis differs from citation indexes. The articles are not selected purely by how many times they have been cited elsewhere, but whether, in the view of the experienced editors they are critical for an understanding of how subjects have developed. Each Research Collection title in the series is distinct and so the 50 books cover the full breadth of law and economics, with significantly less bias shown towards the most researched topics.

So what and who are the most influential?

When it all started

fig 1

Figure 1. When the papers include in Economic Approaches to Law series were published. Papers included more than once are counted multiple times.

As the chart above demonstrates, the foundations of law and economics study were laid in the 1950s and 1960s, but it was not until the 1970s that the field really took off.

Figure 1 is not exhaustive, however. The series has reproduced a small number of pieces originally published before 1900, by Aristotle (Commons and Anti-commons), Adam Smith (In the Economics of Comparative Law), James Madison (Economics of Constitutional Law) and Augustin Cournot (Commons and Anti-commons).

Leading thinkers

23 scholars have seen their work included in the series 9 or more times. Of the below, the work of Judge Richard Posner and Professor Steven Shavell features the most regularly, an impressive 34 times each.

Nearly half of the authors listed below have also contributed directly to the series as volume editors.

Richard A. Posner 34
Steven Shavell 34
Andrei Shleifer 24
Francesco Parisi 20
Richard A. Epstein 20
William M. Landes 17
Alan O. Sykes 16
Louis Kaplow 16
A. Mitchell Polinsky 14
Eric A. Posner 14
Robert Cooter 14
Florencio López-de-Silanes 13
Rafael La Porta 13
Cass R. Sunstein 12
Lucian Arye Bebchuk 12
Robert W. Staiger 12
Barry R. Weingast 11
Kyle Bagwell 11
Daniel L. Rubinfeld 10
Alan Schwartz 9
Chris William Sanchirico 9
Geoffrey P. Miller 9
Jeffrey J. Rachlinski 9

Table 1. Authors and the number of times that papers authored or co-authored have appeared in the Economic Approaches to Law Series.

 

Most included papers

Given the number topics the series has covered since it began, and the 50 entries we have accumulated in that time, it is perhaps surprising that relatively few papers are duplicated between volumes. Below is a list of those that have been included 3 or more times.

Bruce L. Benson (1989), ‘The Spontaneous Evolution of Commercial Law’ 4
Guido Calabresi and A. Douglas Melamed (1972), ‘Property Rules, Liability Rules and Inalienability: One View of The Cathedral’ 4
Harold Demsetz (1967), ‘Toward a Theory of Property Rights’, American Economic Review, 57 (2), May, 347–59 4
Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert W. Vishny (1998), ‘Law and Finance’ 4
A. Mitchell Polinsky and Yeon-Koo Che (1991), ‘Decoupling Liability: Optimal Incentives for Care and Litigation’ 3
Lisa Bernstein (1992), ‘Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry’ 3
R.H. Coase (1960), ‘The Problem of Social Cost’ 3
Richard A. Posner (1973), excerpts from ‘An Economic Approach to Legal Procedure and Judicial Administration’ 3
Robert C. Ellickson (1986), ‘Of Coase and Cattle: Dispute Resolution Among Neighbors in Shasta County’ 3

Table 2. Most included papers in the Economic Approaches to Law series

So what are the most influential papers on Law and Economics?

The data and analysis presented in this blog piece is an amalgamation of the key scholarship that has influenced (and continues to influence) many of the individual strands of law and economics. Can we use this data to identify definitively the key pieces of research across the entire discipline? Perhaps not. The size and complexity of the discipline, coupled with the relatively minor incidence of duplication between volumes, diminishes the usefulness of a purely objective, data-led, approach.

Help, though, is at hand.

Our EAL series editors, Judge Richard Posner and Professor Francesco Parisi, have recently updated and reviewed their classic 1997 survey of the law and economics literature. Their personal assessment of the field is now available online. Alongside each of our new print edition Research Collections it can now be purchased by individuals as an Elgar Research Review* for $35. To give you a taste, it is currently free to access until the end of June 2017.


Notes

*Elgar Research Reviews are online only versions of our multi-volume Research Collections, comprising the list of recommended readings and the editor’s original review article, but without access to the reprinted works themselves. They are available pay-per-view via our online platform Elgaronline.

The list of full printed Research Collection books that include the reprinted articles can be found on our website here.

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